Yesterday’s item here on The Blog took a quick look at two IndustryWeek articles about ‘fixing’ U.S. manufacturing. Using data both from their own experience and the IW/MPI 2003 and 2004-2005 Survey of Manufacturers, a company called DDI specifically addresses the critical element of labor.

DDI is a company which, according the their About Us information, has since 1970 ‘worked with more than 1,000 companies in virtually every industry,’ continuing that they help hire and promote 8,000 people every day. DDI’s record includes some impressive stats. For instance, their client base includes more than 50% of the Baldrige National Quality Award winners and nearly half of Fortune’s Best Companies to Work For. So, I’ll consider them a credible source.

To reiterate a couple of points from yesterday’s article, IW says ‘U.S. manufacturers seem to be treating the skilled labor shortage like a leaking kitchen sink. They are ignoring it because the kitchen can still function, but eventually, that hidden pipe will rot the floor, and the sink will crash into the basement. Good-bye fresh water to drink. Good-bye cooking and cleaning. In short, good-bye kitchen.’ Also, our own U.S. Bureau of Labor Statistics predicts that the number of skilled worker posts will reach 5.3 million by 2010 and 14 million by 2015.

DDI has recently made available a very interesting report of their own which addresses the human element of manufacturing, entitled 2004-2005 Super Human Resources: Realizing Manufacturing Excellence Through Better People. (PDF)

Newer, better, faster equipment and the latest technologies and processes, according to DDI, are only part of the equation in achieving world-class manufacturer status. ‘…Most manufacturers ignore employees as they search for fractional reductions in cost, forgetting that the single most important driver for improved business performance and profit margins is employee engagement.’ DDI says that these manufacturers track performance metrics and bottom line-related effects of equipment and processes very well, but consistently overlook measurements regarding plant-level HR activities—that can lead to major manufacturing performance improvements.

Facilities with ‘a full complement of HR initiatives’ (e.g., Super Human Resource Plants) outperform their peers in areas such as…

• Median labor turnover rates (2% vs. 6%)
• Median gross profit margins (50% vs. 30%)
• Median ROI on capital (18% vs. 13.3%)
• Likelihood of achieving world-class manufacturing (More than 75% of the Super HR plants reported ‘significant progress’ toward that goal vs. 26% of all other IW/MPI Census plants.

Manufacturers would be in better shape, implies DDI, if they would devote as much time (or more) to HR as they do other activities—for example, investing in hiring effectiveness, leadership development, and training on an on-going basis.

How much training do most manufacturers provide their employees? According to DDI, less than 24% provide each plant employee with less than 8 hours of formal training annually. Annually! (Or, averaging out to nine minutes per week.) About a third provide more than twenty hours, and only 10% provide more than 40 hours. How much of a difference can training make? DDI maintains that plants providing more than 20 hours of training reported median sales per employee of $181,000 per year. With less than 20 hours of training, that figure drops to $150,000. The company makes the point, however, that training does not replace, for example capital equipment expenditures; rather, that these investments go hand-in-hand.

Training, according to DDI, should lead to employees taking ownership of their day-to-day activities. Often it seems, however, the ‘empowerment’ is just talk; that ‘traditional management methods’ lead to mistrust and chaos on the plant floor. Engaging employees is the key here: making their jobs more interesting, motivating, and rewarding. Also interesting is DDI’s position that process improvement programs such as Lean Manufacturing or TWM ‘simply cannot gain traction without employees ‘owning’ their jobs’

Super HR plants, says DDI, train more, empower more, and pay more. Does it pay off for the employers? Yes, with lower labor turnover rates as mentioned previously. Such plants reported a median 50% gross profit margin vs. 30% for all other Census plants. While SHR plants do spend more on overhead than other plants (29% vs. 26% of cost of goods sold), they spend less on materials (47.5% vs. 50%). Return on invested capital is higher at SHR plants, and median operating equipment efficiency is at 92% vs. 79% for other facilities.

Leveraging technology is another important factor. SHR plants were not only more like to adopt newer IT-related applications, but turn those applications into a ‘major improvement’ to profitability. For instance, 78% of SHR plants used asset management systems, vs. 33% for other companies. Of the SHR plants, 31% said that asset management was a major contributor to profitability, compared to just 11% at non-HR plants.

There you have it: a really good indication that the best equipment and processes just won’t work without also investing in the people who use them every day.